HCI Group, Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual Form 10-K, with fourth-quarter results included in the full-year statements and quarterly schedules.
Business Context
HCI is a Florida-based insurance holding company primarily providing homeowners, condominium, tenants and dwelling-fire property and casualty insurance through Homeowners Choice Property & Casualty Insurance Company. Its policies were obtained principally through Citizens Property Insurance Corporation take-out transactions and a 2011 HomeWise transaction. The company also operates reinsurance, real estate, marina, restaurant and information-technology businesses.
- Approximately 160,000 policies in force at December 31, 2013, generating approximately $390 million of annualized gross premiums.
- Completed its tenth Citizens assumption transaction in November 2013, adding approximately 34,000 policies and $78 million of annualized premiums.
- Alabama subsidiary HCA was licensed in August 2013 and was expected to begin writing policies in 2014.
- Flood coverage began in Florida in January 2014 on a limited basis.
Financial Performance and Key Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Gross premiums earned | $337.1 million | $233.6 million | +44.3% |
| Net premiums earned | $234.2 million | $157.7 million | +48.6% |
| Total revenue | $241.1 million | $163.1 million | +47.8% |
| Income before taxes | $106.5 million | $49.6 million | +114.7% |
| Net income | $65.6 million | $30.2 million | +117.4% |
| Income available to common stockholders | $65.5 million | $29.8 million | +119.4% |
| Diluted EPS | $5.63 | $3.02 | +86.4% |
| Net cash from operating activities | $55.5 million | $106.3 million | -47.8% |
| Cash and equivalents | $293.4 million | $230.2 million | +27.4% |
| Total investments | $146.0 million | $60.9 million | +139.7% |
| Total stockholders’ equity | $160.5 million | $121.3 million | +32.4% |
- Net income margin was approximately 27.2%; pretax margin was approximately 44.2%.
- Losses and loss adjustment expenses declined to $65.1 million from $66.3 million despite substantial premium growth.
- Loss ratio improved to 27.8% from 42.1%; expense ratio was broadly stable at 29.7% versus 29.9%.
- Combined ratio improved to 57.5% from 72.0%; measured against gross premiums earned, it improved to 39.9% from 48.6%.
- Year-end losses and loss adjustment expense reserves were $43.7 million, including $2.5 million of favorable prior-year development.
Cash Flow, Debt and Liquidity
- Operating cash flow was $55.5 million. Investing cash flow used $90.0 million, primarily for purchases of fixed-maturity and equity securities. Financing cash flow provided $97.8 million.
- Cash increased to $293.4 million, while available-for-sale securities totaled $129.8 million.
- Long-term debt was $126.9 million at year-end, consisting of $40.25 million of 8% senior notes due 2020 and $103 million principal amount of 3.875% convertible senior notes due 2019, recorded at a net carrying value of $86.7 million.
- Total contractual obligations were $185.7 million, including $184.4 million of long-term debt principal and interest payments.
- HCPCI statutory capital and surplus was $116.9 million versus a required minimum of $20.4 million. The company stated that its insurance subsidiaries exceeded applicable risk-based capital requirements.
- The company paid $10.9 million of common dividends and declared quarterly common dividends of $0.225 in the first three quarters and $0.275 in the fourth quarter.
Material Changes Versus 2012
- Growth was driven primarily by the November 2013 and November 2012 Citizens assumptions and related renewals.
- Reinsurance premiums ceded increased to $102.9 million from $75.9 million, but declined to 30.5% of gross premiums from 32.5%.
- 2013 results included a $12.5 million reduction in ceded premiums from retrospective reinsurance provisions, including an $8.8 million recognized benefit and $3.7 million deferred. This benefit could reverse or be charged to earnings if qualifying catastrophe losses occur.
- Other operating expenses increased to $34.3 million from $21.1 million, including higher compensation, stock-based compensation, charitable contributions and administrative costs.
- Interest expense increased to $3.6 million as a result of the two 2013 debt offerings.
- HCI issued $143.25 million of debt and used approximately $29.9 million of convertible-note proceeds to repurchase 622,751 common shares through a prepaid forward contract.
- Series A preferred shares outstanding declined to 110,684 from 241,182 after 130,498 shares converted into common stock.
Outlook, Risks and Unusual Items
Management emphasized continued growth through policy assumptions, geographic expansion, voluntary policies and new products, but provided no quantitative earnings or revenue guidance in the filing.
- The business remains heavily concentrated in Florida and is exposed to hurricanes, tropical storms, tornadoes and other catastrophes. Reinsurance may be insufficient, unavailable or uneconomic, and reinsurers could fail to pay.
- Loss reserves are inherently uncertain. A 10% increase in claim severity was presented as reducing equity by approximately 1.66% net of tax.
- Florida insurance regulation may restrict premium increases, cancellations, non-renewals, dividends and market expansion. Rate and form approvals are required.
- Competition, pricing pressure, litigation, changing judicial interpretations and claims inflation could impair margins and reserve adequacy.
- HCI Group relies on subsidiary cash flows to service debt and fund corporate obligations; insurance subsidiary dividends are subject to regulatory restrictions.
- The company disclosed an unaccrued Florida premium-tax contingency of approximately $1.9 million related to proposed disallowance of salary credits and stated that it intends to defend its position.
- An environmental remediation liability of $33,000 remained at year-end; additional costs are possible but management did not expect a material liquidity or financial-condition impact.
- Related-party reinsurance arrangements involved company executives, directors and family members as capital participants in certain reinsurers. The company stated that the arrangements were collateralized and priced competitively.
- The company received an Aon Benfield dispute ruling in its favor; a related $757,000 receivable was collected in January 2014.
Most Important Facts to Verify
- Whether the favorable 2013 loss ratio and $12.5 million retrospective reinsurance benefit are sustainable or materially reverse after catastrophe losses.
- The adequacy of $43.7 million of loss and loss adjustment expense reserves, including assumptions regarding claim severity and development.
- Actual catastrophe exposure, reinsurance retentions, limits, exclusions, collateralization and reinsurer credit quality for the 2014 treaty year.
- The terms, conversion dilution and settlement alternatives associated with the $103 million convertible senior notes.
- Regulatory approval and capital requirements for dividends, Alabama expansion, new flood coverage and future Citizens assumption transactions.
- Resolution of the approximately $1.9 million Florida premium-tax audit dispute and any additional environmental remediation costs.
- Whether operating cash flow can support claims, reinsurance premiums, debt service, dividends and planned growth without additional financing.